DoF says warnings of overheating farfetched

Posted on July 03, 2017

THE Finance department said macroeconomic fundamentals remain sound and that the risk of the economy overheating, flagged by debt rating agencies, remains farfetched.

Finance Secretary Carlos G. Dominguez III -- THE PHILIPPINE STAR_ KRIZ-JOHN ROSALES
Moody’s Investor Service affirmed the country’s Baa2 credit rating last week, but noted “overheating” risks amid a stable growth outlook and sound banking system.

Analysts from Fitch also warned last month of the same risks that warrant monitoring.

“There is ample evidence that the economy is far from overheating,” Finance Secretary Carlos G. Dominguez III told reporters on Friday when asked to respond to the claims of overheating.

He said that headline inflation rates have started to settle down, after hovering at the high end of the central bank’s 2-4% target band since February.

“Number one, growth is only at 6.4%, slightly below our target of 6.5 to 7.5%. Inflation is declining to 3.1% in May, from 3.4% in April, and core inflation is declining from 3% in April to 2.9% in May,” he said.

As of end-May, inflation averaged 3.1%.

Overheating occurs when economic activity generates more demand than supply, which may lead to inflationary pressure.

“Investment growth is robust, faster than consumption, investment growth is topping 7.9% in the first quarter, compared to 5.8% growth in household consumption. Actually it is only a 5% growth rate if we include government,” he added.

“Lending rates are low, real estate rates are second lowest in the ASEAN (Association of Southeast Asian Nations) countries; this implies that investible savings are available for lending, meaning the balance of payments is strong, the deficit is only 1.7% of GDP (gross domestic product), current account deficit is only 0.45% of GDP in quarter one.”

“So I don’t think there is really much danger in overheating,” he added.

Mr. Dominguez also noted that the debt-to-GDP ratio is declining to 43.6% of GDP in March this year, from the 45.9% ratio recorded at end-2016.

The government aims to spend P8.4 trillion over the medium term, in a bid to grow the economy by 7-8% starting next year until 2022.

In its meeting with credit raters in Washington during the World Bank spring meetings, Finance Undersecretary Gil S. Beltran said that the debt rating agencies are more worried about the uncertainty brought about by President Donald J. Trump, in the US rather than developments in the Philippines.

“They raised concerns about Trump, which we think, we don’t have a hold on that so what can we do? Nothing on domestic policy,” he said.

“The capacity of the country is growing with the increasing investment. So we don’t think there is going to be impact on inflation, as a matter of fact, for the latest estimates for June we are expecting a further decline in inflation,” he said.

“With capacity constraints we don’t see it,” he added. -- E.J.C. Tubayan